When we discussed the multiplier we discussed the impact effect. for example, suppose that g increases by 100 to 600 and we assume, as we often do, that firms match the increase in demand by increasing y by 100. in round two, this is an increase in income of 100 to consumers. we will trace out exactly where this 100 increase in income goes in the second round. recall, there are three leakages to address (via taxes, imports and savings)
given that t=.25, we know that .25 of every dollar increase in gross income is a leakage due to taxes. since the increase in income is $100, we know the leakage due to taxes is:
a) $25
b) $100
c) $75
d) 25 cents.